Wal Mart Financial Ratio Analysis Essay

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Introduction



Wal-Mart is the world’s largest retailer. They operate in many countries around the world, and have over 2 million employees. The largest market for Wal-Mart is the United States. Wal-Mart is the biggest grocer in the country, one of the biggest online retailers as well. By analyzing the financial statements of Wal-Mart, one can ascertain the company’s financial health as of 2015.



Financial Ratios



Financial statements for publicly traded companies are compiled according to a specific set of rules, and a format that is established both by convention and by the governance of the Securities Exchange Commission. The value of having these rules is that the information contained in the financial statements is reliable, and comparable. Not only can one compare Wal-Mart’s financial performance across different years, but it is also possible to compare Wal-Mart’s performance against other companies in its industry.



One of the means by which financial statements are analyzed is through the use of ratios. The ratios are established by convention – typically the same ratios are used by analysts, because they have clear definitions and established formulas. This means that, for example, a current ratio is always done the same way. Again, this helps analysts to understand companies and compare their numbers across years and industries. The current ratio for Wal-Mart, for example, is calculated the exact same way as the current ratio for Target. This comparability and transparency helps people to assess different investments, for example if you want to invest in the retail sector you can choose between companies more easily by using this form of financial statement analysis.

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Wal-Mart Ratio Analysis



The following are Wal-Mart’s financial ratios for 2015:



Wal-Mart 2015 Financial Ratios



Current Ratio

0.97

Quick Ratio

0.28

Debt/Equity

0.50

Inventory Turn

8.09

Receivables Turn

71.65

Total Asset Turn

2.38

Net Margin

3.37%

ROA

8.03%



The current ratio is a liquidity ratio, which indicates the level of liquidity that the company has – basically its financial risk in the next year. The quick ratio is also a liquidity ratio. The current ratio is the most basic liquidity ratio, and the rule of thumb is that the company should have around the same value for current assets as it has for its current liabilities, a current ratio of 1.0. Wal-Mart’s level is just under, and thus is perfectly comfortable. Several other ratios provide important context for this number. The quick ratio is an important variable for retailers in particular, because it is the current ratio, but minus the inventory. The principle is that the inventory may not be liquidated at cost – in fact the company might be sitting on unsellable inventory, and thus the truer measure of liquidity for a retailer requires removing the inventory from the measure. So the quick ratio for Wal-Mart is 0.28. This is a reasonably healthy quick ratio, especially given that Wal-Mart will sell most of its inventory, and it shows that Wal-Mart’s liquidity is not entirely reliant on inventory that may have to be sold at a discount.


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References

Wal-Mart 2015 Annual Report. Retrieved April 14, 2018 from https://s2.q4cdn.com/056532643/files/doc_financials/2015/annual/2015-annual-report.pdf





 

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